Contributor: Adam Bishop, Senior Associate, Tax Credits & Incentives Advisory
Challenge:
The COVID-19 pandemic created an ever-changing environment, where state and local governments across the US struggled to find a balance between keeping citizens safe and keeping the wheels in motion.
The initial reaction was a series of shutdown orders for non-essential businesses and stay-at-home orders for those most at risk: the elderly and our children. This almost universally led to the premature end of the 2019 – 2020 school year, and a virtual or hybrid environment was frequently implemented for the 2020 – 2021 school year. The subsequent shift to virtual school programs helped to not only keep children safe and learning but also allowed various scholastic institutions to keep their staff employed.
Colleges, universities, private schools and charter schools all experienced the struggle of shifting to a virtual learning environment. Due to the nature of these schools, many extracurricular and supplementary educational offerings that form the basis of these schools’ missions were severely impacted. Everything, from theater to sports to band, was incredibly restricted or canceled altogether. These programs, along with fundraisers and after-school care, were usually a more than nominal portion of the educational institution’s income. Due to COVID-19 government mandates, this income was significantly reduced.
To support businesses, including educational institutions, the Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Employee Retention Credit (ERC). The ERC incentivized and rewarded businesses that kept employees while they were impacted by COVID-19 government mandates.
Educational Institute 1
Educational Institute 1 is a nationally ranked private, nonprofit college with an average of 412 full-time employees before the pandemic.
Educational Institute 2
Educational Institute 2 is a private day school with an average of 265 full-time employees before the pandemic.
Both Educational Institutions encountered a negative impact on their businesses in the second quarter of 2020 and through the first quarter of 2021.
Local and state mandates placed limitations on the number of people both Educational Institutions could host at in-person events in an effort to combat the virus. Initially, in 2020, educational institutions were required to switch to remote learning, but they were not required to close their doors completely.
When they were able to reopen, they did so under a limited scope of operations due to capacity restrictions. This limited interactions with potential students, parents, donors, customers, and clients which resulted in significant operational impact. Like most schools, these educational institutions rely on in-person fundraising events where the staff and teachers can interact with parents, students and alumni.
COVID-19 Government Mandates
Government mandates that affected Educational Institutions 1 and 2 were issued early in 2020, lasting through the year and extending through March 2021. These mandates forced both Educational Institutions to limit the number of people they could host at in-person events.
For example, in the state that both Educational Institutions were in, they had an Executive Order that became effective in February 2021 and further extended the mandates while relaxing gathering restrictions to allow 25 people inside and 50 people outside at events. Another Executive Order, effective March 2021, also extended the previous mandates while allowing limited occupancy at facilities and events. A third Executive Order, issued in April 2021, extended the 204 restrictions but increased the number of people allowed to gather at indoor and outdoor events.
To comply with these mandates, schools had to often cancel or at least postpone many programs, ranging from scholastic clubs to graduation events. The inability to operate in a normal fashion regarding the services and mission of these institutions, due to the government COVID- 19 mandates, established the schools’ eligibility for ERC.
Methodology:
When qualifying for the ERC tax credit, the CARES Act requires either a significant decline in gross receipts or a partial to full suspension of operations due to a COVID-related government mandate. For educational institutions, COVID-related mandates often resulted in a partial suspension of normal services and operations, qualifying them for ERC.
The educational institutions presented here had a drastic decline in gross receipts due to the limited capacity of in-person events both institutions depend on for monetary support. The educational institutions were able to show that the decline was the resulting impact of COVID-related government mandates and were able to claim the ERC.
The first step to claiming the ERC is to consult with a reputable provider, who can help assess the avenues to qualification and the potential calculated benefit when claiming the ERC. Qualification does not immediately generate benefits.
Once an estimate of benefit is established, it is often beneficial to consult with the business’s CPA to see if amending the returns is worth the financial outlay. The ERC benefit is a credit that must be removed from expenses for the year of the claim. For any schools that operate as a non-profit, there is no need to amend the Form 990 or other previous year tax filings.
When the private school is satisfied and prepared to take the tax position of claiming the ERC, it will need to complete Form 941-X for the qualifying quarters in 2020 and 2021. Following the completion of Forms 941-X, they should be mailed via registered or certified mail to the Department of the Treasury Internal Revenue Service.
There are a few important things to remember when claiming the ERC tax credit. You must understand it is your responsibility to file Form 941-X with the IRS. The 2020 and 2021 credits are claimed on Form 941-X: Adjusted Employer’s Federal Quarterly Tax Return. Lastly, remember to mail only the completed form. Do not send the Form 941 Worksheet, as this copy is only for your future reference.
Data Request:
Data for Scoping
(can be discussed on scoping call before provided)
- Prior filed Form 941 for 2020 and 2021
- Organization Charts: Provide Legal Entity Organization Charts so we may document the controlled group
- Number of Full-Time Employees in 2019 across the controlled group: FTE is an employee that works 130+ hours per month or +30 hours per week
- Government Mandates: We can discuss this in more detail – Identify all company locations where government orders may have caused a partial shutdown
- Gross Receipts by Quarter 2019 – 2021
- PPP Data:
- 2020 PPP Forgiveness Application Form 3508 (or b.)
- 2020 PPP amount, covered period and other qualified expenses
- 2021 PPP Forgiveness Application Form 3508 (or d.)
- 2021 PPP amount, covered period and other qualified expenses
Data for Project
- W-2 Data: Provide Gross Wage and employer Health Plan Expense data by employee by pay date for each qualifying Quarter in 2020 / 2021.
- Employee ID (NUMBER)
- Employee Name (NAME)
- Employee is Owner? (Y/N)
- Employee related to Owner? (Y/N)
- Employee Entity Name (NAME)
- Wages Paid (Amount)
- Employer Healthcare Costs Paid (Amount)
- COVID-19 Sick Leave Wages (Amount)
- Family Leave Credit Wages (Amount)
- Employee Included in WOTC Credit? (Y/N)
Educational Institute 1
| Credit Period | ERC Amount |
| Quarter Ended March 31, 2021 | $3,200,00 |
| Quarter Ended June 30, 2021 | $1,800,00 |
| Total Credit | $5,000,000 |
Educational Institute 2
| Credit Period | ERC Amount |
| Quarter Ended March 31, 2021 | $2,200,000 |
| Quarter Ended June 30, 2021 | $1,700,00 |
| Total Credit | $3,900,000 |
Significance:
The ERC was able to aid educational institutions that retained employees during the COVID-19 pandemic. Educational institutions that qualify for the benefit are given a significant refund to compensate for the various financial setbacks they faced during 2020 and 2021.
Educational Institution 1
Through the ERC, Private School 1 was able to save more than $5 million.Educational Institution 2
Through the ERC, Private School 2 was able to save more than $3.9 million.
ERC Guidance
Cherry Bekaert has an experienced and knowledgeable ERC team that can help guide your private school in the application and claiming process for ERC.
